NM Credit Strengths Rio Rancho ... - Amazon Web...

U.S. PUBLIC FINANCE

CREDIT OPINION19 May 2016

New Issue

Contacts

Heather Correia 214-979-6868Associate [email protected]

Christopher Coviello 212-553-0575VP-Senior [email protected]

Rio Rancho Public School District No. 94,NMNew Issue - Moody's Assigns Aa3 to Rio Rancho PSD No. 94,NM's $25.3M GO Rfdg Bonds, Ser. 2016

Summary Rating RationaleMoody's Investors Service has assigned a Aa3 underlying rating to Rio Rancho Public SchoolDistrict No. 94 (Sandoval), NM's $25.3 million General Obligation Refunding Bonds, Series2016. Moody’s maintains a Aa3 rating on $97 million in outstanding parity debt. Moody's hasalso assigned a Aa1 enhanced rating to the General Obligation Refunding Bonds, Series 2016based on the New Mexico School District Enhancement Program (NMSDEP) - Post March 30,2007.

The Aa3 rating reflects the district's large tax base, which benefits from proximity toAlbuquerque; narrow, albeit stable, financial position; and manageable debt burden withrapid principal payout. The rating further incorporates the district’s average socioeconomicprofile and elevated pension burden.

The Aa1 enhanced rating on the Series 2016 General Obligation Refunding Bonds is based onour assessment of the NMSDEP - Post March 30, 2007 and a review of the district's proposedfinancing. For additional information on the program, please see Moody's report dated May4, 2008.

Credit Strengths

» Sizeable and stable tax base

» Manageable debt burden with rapid payout

Credit Challenges

» Narrow reserve position in comparison to Aa3 peers

» Elevated pension liability

Rating OutlookMoody's generally does not assign outlooks to local government credits with this amount ofdebt outstanding.

Factors that Could Lead to an Upgrade

» Maintenance of positive operations, increasing reserves and fund balance

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MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 19 May 2016 Rio Rancho Public School District No. 94, NM: New Issue - Moody's Assigns Aa3 to Rio Rancho PSD No. 94, NM's $25.3M GO Rfdg Bonds, Ser. 2016

» Continued expansion of the tax base with corresponding increase in wealth levels

Factors that Could Lead to a Downgrade

» Imbalance of operations that weaken financial flexibility

» Tax base contraction

» Significant increases in debt or pension burdens

Key Indicators

Exhibit 1

Source: District audits; Moody's Investors Service

Detailed Rating Considerations - EnhancedMoody's has assigned an enhanced rating of Aa1 to the Series 2016 General Obligation Refunding Bonds, equivalent to the NMSEP-Post March 30, 2007 programmatic rating. Ratings on individual intercept financings depend on the programmatic rating as well as ourevaluation of the sufficiency of interceptable revenues, the timing of the state's fiscal year relative to scheduled debt service paymentdates and the transaction structure.

Based on the district's state equalization guarantee (SEG) funds for fiscal year 2015, interceptable state-aid provides an ampleminimum of 7.21 times coverage of maximum periodic debt service. Further, state revenues provide an adequate minimum 6.61times maximum periodic debt service coverage when coverage is stressed by deducting the state's final monthly state aid paymentwithin a fiscal year. State-aid funding levels for New Mexico school districts have been stable in recent years, but have been subjectto midyear cuts to address fiscal stress at the state level within the last decade. This weakness, however, is mitigated by ample debtservice coverage even if aid is curtailed over the course of the year. Principal payments are scheduled for August, early in the State'sfiscal year providing for an average interval to mitigate the risk of late budgets. The program requires the appointment of a third-partyfiscal agent, who is required to notify the state if an intercept of SEG is required. The Bank of Albuquerque is the fiscal agent for thecurrent sale.



Detailed Rating Considerations - UnderlyingEconomy and Tax Base: Tax Base Shows Signs of Recovery after RecessionThe district's tax base is expected to expand modestly over the mid-term as development in the healthcare and retail sectors continue.Rio Rancho PSD is 17 miles north of Albuquerque, and benefits not only from proximity to the state's economic hub, but institutionalpresence provided by UNM, Sandia National Labs and Kirtland Airforce Base. The district's fiscal 2016 assessed value (AV) is $2.1 billion,derived from a large full value (FV) of $6.3 billion. Of note, fiscal 2016 represents the first year of expansion since fiscal 2011. Positively,preliminary values from Sandoval County Assessor indicates that fiscal 2017 AV increased by 1.5%. Over the mid-term, the districtexpects the tax base to rebound, driven by commercial development, specifically expansion of Presbyterian Rust Medical, which hasencouraged both retail and residential development in nearby proximity. Several companies, such as Alliance Data Systems, Bank ofAmerica and Convergys Corporation, are adding hundreds of jobs during 2016. Officials report that Intel has not announced layoffsin the Rio Rancho office. However, since 2013, the workforce has declined from 3,300 to 1,900. Officials are hopeful that furtherreductions will be offset by additional jobs created elsewhere in the economy.

The district's local economy is supported by average wealth indices, with median family income of 104.8% per the 2013 AmericanCommunity Survey. The tax base is not concentrated in minerals or taxpayers. February 2016 unemployment levels of 6.3% are in linewith the state's 6.3%, and remain slightly elevated compared to the nation's 5.2%.

Enrollment is stable overall. Since fiscal 2012, enrollment has increased by 0.2% on average, with a fiscal 2016 student count of 16,883.Fiscal 2017 enrollment is expected to be flat. Officials explain that current facilities are at or over capacity. While the district has usedbond proceeds to purchase land to build new schools, the current financial position will not support operational start-up costs. Officialshave proposed setting aside approximately $1.2 million over a three year period to address future costs. Future credit reviews will focuson the district’s ability to address enrollment needs without compromising the already limited financial position.

Financial Operations and Reserves: Reserves Increase in Fiscal 2015 but Still Remain NarrowThe district's finances are expected to remain stable over the near-term given conservative financial management. After two deficitsin fiscal 2013 and fiscal 2014 that depleted fund balance, the district reported a $1.4 million surplus in fiscal 2015, increasing GeneralFund balance to $6.7 million, or a narrow, but improved, 5.4% of revenues. Typical of New Mexico school districts, the district receivesa majority (95.3%) of its revenues from the state.

The fiscal 2016 budget reflects a $5.5 million use of cash reserves; however, based on performance, the district is expecting to end theyear with minimal change in General Fund balance. For fiscal 2017, the district has budgeted use of $5.1 million in cash balance. Thedistrict conservatively budgets assuming a full staff, realizing savings through attrition, vacancies and resignations. As such, it is unlikelythe district will utilize the full $5.1 million.

Management’s fund balance target is to maintain 7% to 8% in reserves; Moody’s notes that this is very limited compared to Aa3 peers.Future credit reviews will focus on the district’s ability to build to, and ideally, surpass, fund balance targets. Given the limited nature ofthe district’s reserves, draws could place downward pressure on the rating.

LIQUIDITY

The district's cash position is stable. Fiscal 2015 year-end General Fund cash was $16.3 million, or an adequate 13.2% of revenues.

Debt and Pensions: Manageable Debt Burden; Elevated Pension BurdenThe district's debt profile will likely remain manageable over the mid-term, despite future borrowing, given rapid principal amortization.At 1.9% of fiscal 2016 FV, the district's debt burden is in line with state and national medians. Principal amortization is above averagewith 97.6% retired in ten years. Officials plan to approach voters in August 2016 with hopes of authorizing a $60 million bond package.If approved, the district will issue debt annually through 2020. Of note, the district’s two mill levy (SB9) expires in 2018. The districtplans to seek reauthorization at that time.

DEBT STRUCTURE

All the district's debt is fixed rate, and is fully amortized by fiscal 2027.

DEBT-RELATED DERIVATIVES

The district has no derivatives, swaps or variable-rate debt.



PENSIONS AND OPEB

The district has an above-average employee pension burden, based on unfunded liabilities for its share of the Educational RetirementBoard (ERB), a cost sharing plan administered by the state. Moody's fiscal 2015 adjusted net pension liability (ANPL) for the district,under our methodology for adjusting reported pension data, is $406.7 million, or an elevated 2.88 times operating revenues. Thethree-year average of the district's ANPL to operating revenues is 2.88 times, while the three-year average of ANPL to full value ishigh at 6.50%. Moody's ANPL reflects certain adjustments we make to improve comparability of reported pension liabilities. Theadjustments are not intended to replace the district’s reported liability information, but to improve comparability with other ratedentities.

The New Mexico pension plan funding structure experienced several changes with the signing of SB 115, including the reduction of acost-of-living adjustment (COLA) and increases in employee contributions. The legislation will maintain the funding changes until theplan has reached 100% funding, which is estimated to be achieved in 2043. We believe the funding changes adopted in SB 115 willlimit budgetary pressure on the district related to future pension costs.

For more information on Moody's insights on employee pensions and the related credit impact on companies, government, and otherentities across the globe, please visit Moody's on Pensions at www.moodys.com/pensions.

Management and GovernanceNew Mexico school districts have an institutional framework score of “A,” or moderate. Districts have a low ability to raise revenuesbecause state aid provides over 95% of funding, and property taxes are subject to a small 0.5 mill cap. State aid is moderatelypredictable given a recent trend of increased funding and a history of funding cuts over the past decade. Expenditures, which areprimarily comprised of personnel and facility costs, are moderately predicable given flat student enrollment levels. Districts have amoderate ability to reduce expenditures given above average fixed costs.

The district is committed to maintaining an emergency Reserve Operational Budget set-aside of $1 million and an additional RestrictedExpenditure set-aside of $2.3 million. These balances are reflected in total General Fund balance.

Legal SecurityThe bonds are secured by ad valorem taxes that are levied against all taxable property within the district without limitation as to therate or amount.

Use of ProceedsProceeds from the Series 2016 bonds will be used to refund Series 2008 (maturities 2016 through 2022) and Series 2009A (maturities2016 through 2023) for net present value savings of approximately $1.5 million.

Obligor ProfileServing the City of Rio Rancho and the surrounding community, the district manages 19 schools and serves approximately 17,000students.

MethodologyThe principal methodology used in this underlying rating was US Local Government General Obligation Debt published in January2014. The principal methodology used in this enhanced rating was State Aid Intercept Programs and Financings: Pre and Post Defaultpublished in July 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

Ratings

Exhibit 2

Rio Rancho Pub S.D. 94 (Sandoval) NMIssue RatingGeneral Obligation Refunding Bonds, Series 2016 Aa3

Rating Type Underlying LTSale Amount $25,260,000Expected Sale Date 05/24/2016



Rating Description General ObligationGeneral Obligation Refunding Bonds, Series 2016 Aa1

Rating Type Enhanced LTSale Amount $25,260,000Expected Sale Date 05/24/2016Rating Description General Obligation

Source: Moody's Investors Service



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